Question 1

Which of the following statements about risk is false?

Accepted Answer

All of the statements are true, so none are false.

Question 2

Which of the following statements is correct?

Accepted Answer

B) is correct because a stock's beta coefficient measures its volatility relative to the market. A stock can be highly positively correlated with the market but still have a beta less than or equal to 1.0 if its movements are less volatile than the market's overall movements.

Question 3

Which of the following statements concerning measures of risk is correct?

Accepted Answer

D

Question 4

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio.The two securities under consideration both have an expected return equal to 15 percent.However,the distribution of possible returns associated with Asset A has a standard deviation of 12 percent,while Asset B's standard deviation is 8 percent.Both assets are correlated with the market with ρ = 0.75.Which asset should the risk-averse investor add to his/her portfolio?

Accepted Answer

The risk-averse investor should choose Asset B because it has a lower standard deviation (8 percent) compared to Asset A (12 percent) while still providing the same expected return (15 percent). Given the investor's risk-aversion, they are more likely to prefer a lower risk asset with the same expected return.

Question 5

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 6

The systematic (market)risk associated with an individual stock is most closely identified with the

Accepted Answer

Beta is a measure of a stock's sensitivity to market movements. A stock with a beta of 1.0 has the same systematic risk as the overall market, while a beta of greater than 1.0 implies higher risk and a beta of less than 1.0 implies lower risk. Therefore, beta is the closest measure to identify the systematic risk associated with an individual stock.

Question 7

In a portfolio of three different stocks,which of the following could not be true?

Accepted Answer

The beta of a portfolio is a weighted average of the betas of the individual stocks. Therefore, the portfolio's beta cannot be less than the beta of each individual stock.

Question 8

Which of the following statements is correct?

Accepted Answer

The statement correctly identifies that when investors require higher rates of return for investments with higher variability, it is evidence of risk aversion. Option A is incorrect because risk aversion implies that investors are willing to pay a higher price for securities with lower risk, rather than let them go unpurchased. Option C is incorrect because while risk aversion implies a dislike for risk, it also implies a willingness to be compensated for taking on risk. Option D is incorrect because the expected returns on the stock of the firms should not be equal if they differ only with respect to risk.

Question 9

Which of the following statements is most correct?

Accepted Answer

Statements B and D are correct because they accurately describe aspects of portfolio theory. B explains that a portfolio of low beta stocks will have a low overall beta, indicating lower risk relative to the market. D correctly states that diversification can eliminate company-specific risk but not market risk, which is inherent to all assets in the market.

Question 10

Which of the following statements is most correct?

Accepted Answer

While diversification does generally reduce the variability of returns, it is possible for a portfolio with just one security to have lower risk than a diversified portfolio if that security has low correlation with the market or other risky assets. Statement C is false as it is impossible to eliminate all nonmarket or company-specific risk. While diversification can reduce this type of risk, events such as a global recession or political instability can still affect all stocks in the market. Statement A is partially true, as diversification reduces the variability of returns on individual stocks, but it does not eliminate this variability entirely.

Question 11

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 12

You have developed the following data on three stocks:  If you are a risk minimizer,you should choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

The answer of You have developed the following data on...

Question 13

Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium. )

Accepted Answer

The answer of Stock A has a beta of 1.5...

Question 14

Which of the following statements is false?

Accepted Answer

If the price of money increases due to greater anticipated inflation, the risk-free rate will increase but it is possible that the SML required rate of return for a stock will decrease because the market risk premium (r_M − r_RF) can decrease, leading to a decrease in the required rate of return for the stock. This is because the market risk premium is a function of the difference between the market return and the risk-free rate, not just the risk-free rate.

Question 15

Which of the following statements is correct?

Accepted Answer

The SML (Security Market Line) represents the relationship between the expected return of a security and its systematic risk, measured by beta. The slope and intercept are determined by market conditions and investor expectations, not by financial managers.

Question 16

The Security Market Line (SML)relates risk to return,for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase,which of the following changes would be most likely to occur?

Accepted Answer

If investors expect inflation to increase, the required return on an average stock would increase to compensate for the higher expected inflation, shifting the SML upwards.

Question 17

Choose the correct answer for the following: (1)Which is the best measure of risk for choosing an asset which is to be held in isolation? (2)Which is the best measure for choosing an asset to be held as part of a diversified portfolio?

Accepted Answer

The coefficient of variation is best for assessing risk when an asset is held in isolation, as it considers both risk and return. Beta is best for a diversified portfolio, as it measures an asset's volatility relative to the market.

Question 18

Which of the following statements is correct?

Accepted Answer

In reality, probability distributions are continuous and infinite, but financial managers simplify them for analysis purposes by reducing the number of possible states or outcomes. The other options have incorrect or incomplete statements.

Question 19

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 20

Which of the following statements is false?

Accepted Answer

While managers should act in the best interests of shareholders, knowing the average time preference and risk tolerance of each individual shareholder is not necessary for them to do so. It is sufficient for managers to act in the best interests of the company as a whole, which in turn benefits shareholders.

Quiz 11: Risk and Rates of Return

Which of the following statements about risk is false?

Which of the following statements is correct?

Which of the following statements concerning measures of risk is correct?

Which of the following statements is most correct?

The systematic (market) risk associated with an individual stock is most closely identified with the

In a portfolio of three different stocks,which of the following could not be true?

Which of the following statements is correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is correct?

You have developed the following data on three stocks: If you are a risk minimizer,you should choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium. )

Which of the following statements is false?

Which of the following statements is correct?

The Security Market Line (SML) relates risk to return,for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase,which of the following changes would be most likely to occur?

Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio?

Which of the following statements is correct?

Which of the following statements is most correct?

Which of the following statements is false?